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Government working on incentive-based coal scheme to help revive sick discoms, reduce financial losses

The government plans to push power sector reforms through its new coal supply mechanism, by ensuring that it benefits only those state distribution companies that agree to raise tariffs periodically and cut distribution losses, a government official said.

The government is working on the incentive-based scheme to award coal supply contracts to state utilities that will distribute it to power generation firms through tariff-based bids so that plants that commit to supply electricity at the lowest rates win the deal.

"The Centre is planning to offer the Coal India contracts to only those state government distribution firms that undertake to revive their financial condition," the government official said. "The plan will incentivise state governments to revive sick distribution companies and also sort out the problem of lack of power purchase agreements to power companies," the person said. Precarious finances of state utilities is considered one of the biggest bottlenecks of the power industry in the country.

Experts say poor functioning of state utilities often leads to long blackouts even when power plants have the capacity to supply more electricity. Many power plants are operating at sub-optimal levels because state power distribution companies have not been inviting tenders to buy power on long-term purchase contracts and are not obliging their existing purchase contracts with generation companies due to weak financial position.

According to India Rating and Research, aggregate losses of all state power distribution companies in the country stood at Rs 69,100 crore in 2012-13. The coal ministry is drafting a policy to auction Coal India contracts to power companies. However, the present contracts of the state-run miner with power companies will not be terminated. The government has already decided to provide coal to power plants affected due to cancellation of captive mining licences by the Supreme Court till May 2016.

Power projects that had temporary coal arrangements with Coal India till their captive coal blocks started operations, too, will continue to get coal till May next year.

Coal India will also earmark 10 million tonnes of coal through spot auction for power plants stressed due to lack of coal. Separate e-auctions of 5 mt of coal each will be conducted for power plants with longand medium-term power purchase agreements and projects with no contracts or shortterm power contracts.

The government has already issued a draft policy for auction of coal supply from Coal India to unregulated sectors like steel and cement. The policy is expected to be finalised soon, the official said.

As per the draft policy circulated for stakeholders' comments by the coal ministry, separate bidding will be held for cement, iron and steel, aluminium and fertiliser plants. As per the proposed mechanism, Coal India will invite bids from companies for supplying a fixed quantity of coal  for five years at a floor price.

source: http://economictimes.indiatimes.com